TrueBlue Inc (TBI) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the TrueBlue conference call. Today's call is being recorded. Joining us today is TrueBlue CEO, Steven Cooper, and CFO, Derrek Gafford. They will discuss TrueBlue's 2011 second quarter earnings results, which were announced today. At this time I would like to hand the call over to Stacey Burke for the reading of the Safe Harbor. Please go ahead Ms. Burke.

Thank you. Here with me today is TrueBlue CEO and President, Steven Cooper, and CFO, Derrek Gafford. They will be discussing TrueBlue's 2011 Q2 earnings results, which were announced after market close today. Please note that slides providing additional background on our Q2 results were included in an 8-K filing today, including a reconciliation of EBITDA to net income. The Company's press release, the accompanying financial schedules, and the Q2 result slides are now available on our website at www.TrueBlueInc.com.

Before I hand you to Steve I ask for your permission as I to read the following Safe Harbor. Please note that on this call management will reiterate forward-looking statements contained in today's press release, and may make or refer to additional forward-looking statements relating to the Company's financial results and operations in the future. Although we believe the expectations reflected in these statements are reasonable, actual results may be materially different. For additional information concerning factors which could cause results to differ materially is contained in the press release and in the Company's filings with the Securities and Exchange Commission including our most recent Forms 10-Q and 10-K.

I will now hand this call over to TrueBlue CEO, Steve Cooper.

Thank you, Stacey. Hello everyone. Today we reported second quarter revenue grew 12% to $320 million,which produced $0.20 per share of net income. Right at the high end of our earnings estimate. Income from operations grew 30% on the 12% growth. Expanding our operating margin by 60 basis compared to a year earlier.

For Q3 we are estimating approximately 17% growth, and 40% growth in income for operations, when normalized for the expired HIRE Act credits. This will expand our operating margin by nearly 100 basis points compared to a year earlier. Leverage in our operating model remains a high priority for our team. With continued environmental pressure on gross margins and slight increases in employee costs related to our revenue growth, we are not showing leverage at our historical expansion rates. However, with the conditions we are operating in, we are proud of the expansion in our operating margin. We remain focused and committed to driving this leverage in our future results.

I am excited about the most recent results we are seeing here in the beginning of Q3, and that we saw at the end of Q2. Revenue continues to accelerate, and gross margins have turned a slight corner, and are showing slight butpositive signs of improvement. In addition, costs that have been added during 2011, which are primarily employee related to support our growth, will stabilize in the back half of 2011.

In Q2 we grew revenue across almost every industry group and geographic region. We are focused to building expertise in several industry vertical markets. Along with driving our local market selling and delivery of services. This multi focus of building national and regional customer relationships along with our strong capability of serving local customers is the driving force behind our strong results.

After Derrek reviews further operational and financial details, I will offer some additional remarks, Derrek.

Thanks Steve. I will start off today with some high level comments on our second quarter results, and our expectations for the third quarter of this year. Then we will cover the operating trends for Q2, and key assumptions for Q3. Any reference to our performance the is based on a comparison to the same period a year ago, unless stated otherwise.

Diluted net income of $0.20 per share was at the high end of our $0.15 to $0.20 expectation. This outperformance was the result of $0.02 of unexpected benefit to gross profit primarily related to the resolution of temporary payroll tax item. For comparison purposes, keep in mind that Q2 2010 had an unusually low income tax rate, which added $1.3 million to net income, or $0.03 per share to our Q2 2010 results.

For Q3 this year we expect total revenue of $360 million to $370 million, representing growth of about 17%,which is an acceleration from the 12% revenue growth experienced in Q2 this year. For Q3 this year we expect diluted net income per share to be $0.27 to $0.32.

Let's review some of the key operating results for Q2 this year. We continue to experience widespread demand across the business, with double-digit revenue growth in most of the industry groups we serve. Construction grew in the mid-teens on top of a $7 million industrial project in Q2 last year. Construction growth came from nonresidential remodel work, and retail and public works projects, as well as industrial construction work, related to our growing success in serving wind and solar energy facilities, and work and plant shutdown maintenance. Manufacturing grew over 20%, but down from the 35% to 50% growth rates we experienced over the last several quarters. Largely due to more challenging comparisons and disruptions related to the Japanese earthquake.

From a geographic perspective we experienced revenue growth in 19 of the top 20 states. From a customer perspective demand was also widespread. The impact from Boeing was mostly neutral, as our revenue for this customer was about the same as Q2 last year. Our monthly revenue growth trends accelerated during the quarter from 14% in April, to 17% in June. Our gross margin for the quarter was 26.7% which was above our high end expectation of 26.2%. This outperformance was primarily due to the resolution of the temporary payroll tax item that I mentioned, that improved gross margin by 50 basis points. Excluding this benefit adjusted gross margin would have been about 26.2% at the high end of the expectation, but 40 basis points lower were than Q2 last year. The 40 basis point decline compared to Q2 last year was due to higher workers' compensation expense, a larger mix of manufacturing and large customer business, and competitive pricing.

SG&A as a percentage of revenue was 21.1% as expected, and 40 basis points less than Q2 last year. On a dollar basis, SG&A increased about $6 million over Q2 last year, primarily due to two factors. First, variable SG&A tends to run about 10% of revenue dollar growth over the prior year period, which equates to about $3.5 million of additional expense this quarter. Second, about $2.5 million of the increase are employee related costs based on filling a number of unfilled positions in our branches, and adjusting compensation across various employee groups.

Let's me provide some background on the unfilled positions. Decreasing our turnover rates has been the predominant driver in filling these open positions. For the first time in our history our branch manager turnover has dropped below 20%. We have brought our branch staffing levels up from recessionary levels. We also made several salary adjustments within our employee base. But make no mistake, our disciplined approach to managing costs has not changed. These are the right strategic long-term decisions to retain high quality employees, and provide the proper service to our customers to maximize long-term revenue growth and profitability.

Let's finish off our discussion of Q2 with a couple of cash flow and balance sheet items. Year-to-date we generated $1 million of cash flow from operations versus $10 million in the same period last year. The drop in cash flow from operations was due to the use of cash to fund the growth of over $20 million of Accounts Receivable due to the increase in revenue. Days Sales Outstanding in Accounts Receivable grew by three days compared to Q2 last year. The increase in DSO was primarily due to the sequential revenue growth from May 2011 to June 2011 of nearly 35% versus a 20% sequential growth rate between the same periods last year. We purchased 1.16 million shares of our stock for about $16 million. About 900,000 of these shares were purchased in Q2, and the remainder in Q3.

Now let's take a deeper dive into some of the key factors in our Q3 profitability expectation. We expect gross margin to be about 26.2% to 26.8%, which is lower than Q3 last year of 27%. In Q3 last year we experienced 40 basis points of nonrecurring benefit from HIRE Act credits. Excluding the HIRE Act credits from Q3 last year adjusted gross margin would have been 26.6%, which is about the mid point of our Q3 2011 gross margin expectations.

For Q3 this year SG&A as a percentage of revenue should be about 19.2%to 20.2%,based on the revenue guidance today. This equates to about a 100 basis decline compared to Q3 last year. In dollars this equals an increase of about $7 million to $8 million over Q3 last year. About $5 million of the increase is due to variable expense associated with the expected revenue increase of over $50 million compared to Q3 last year, and about $2.5 million related to the impact of employee costs I discussed in the Q2 commentary.

Let's cover a few remaining expectations for Q3 2011. We expect depreciation and amortization to be about $4.2 million. We expect about $2 million of CapEx. Diluted shares outstanding for the quarter should be about $43 million. And our effective income tax rate should be about 38% to 40%.

So let me wrap up where we are headed. Excluding the Q3 2010 HIRE Act benefit, Q3 2011 operating income is expected to grow at about 40%. We expect our revenue growth to accelerate to nearly 17% in Q3 versus our Q2 revenue growth of 12%. We have made the right employee decisions to retain key performers and fuel revenue growth. Just as important our gross margin trends have turned the corner. These adjustments put us on a path to harness the strong operating leverage within our business model.

I will now turn the call back to Steve.

Thank you Derrek. Since 2006 we have purchased approximately 12 million shares, or nearly 25% of our outstanding stock. This is a return of approximately $270 million of capital to shareholders. As noted in our findings today our Board of Directors has now authorized a new program to purchase an additional $75 million of our outstanding stock. This new authorization demonstrates we are committed to return capital to shareholders as we have done in the past.

We also continue to pursue acquisitions that can blend into our current operations with a high degree of precision that we believe will result in a high return on investment. During Q2 we acquired A1 Staffing,a small company that fits that criterion. A1 was a respected light industrial staffing provider with eight branches in Kansas, Missouri, Iowa, and Nebraska, And strong customer relationships in those markets. We rolled A1 into our existing operations, and the staff is now working as one team to serve customers and their communities with our broader reach of capabilities.

We also continue to pursue new value creating investment opportunities that will broaden our scope of capabilities and increase our efficiencies in putting people to work. Since 2006 we have invested over $100 million in acquisitions. This has resulted in broadening our capabilities in the industries we serve, along with adding talent to our sales, service and leadership teams. Pre-2006 we served the construction, manufacturing, warehousing, retail, and waste industries. An estimated $5 billion slice of the overall $20 billion staffing market. Since 2006 our additional investments have expanded our market size opportunity to about $13 billion from the $5 billion, which is over a 150% expanded market size.

We remain committed to investing in opportunities in that marketplace, which will build new capabilities and drive further efficiencies for our customers, which we believe will also provide higher returns for shareholders. Our new capabilities and expanded market opportunities we have built and invested in over the past few years, enable us to benefit from improved trends in more industries, and in addition broaden the partnerships we have created with several national and regional customers. We remain confident in our vertical market strategy to drive growth.

There are several components of our vertical market strategy that are fueling our success. First, we have industry specific research and development for each major customer segment. Second, we have an industry leading sales and marketing strategy. Third, we have a dedicated sales team for each vertical market. Fourth, we have strong relationships within each of the vertical markets which we serve, which has proven to expand or credibility in those segments on both a national and local level.

Our talented teams are tuned to their markets. They have been able to anticipate and react to opportunities and challenges better than ever before. We remain committed to our development and retention of our talent. We continue to recruit and develop our talent in all aspects of selling and serving customers. We know that the value we create for customers and shareholders is directly proportional to the quality of our employees. We will continue to make the appropriate focused investments in our people. We have a growing talent pool that is committed to helping us change the world by putting people to work.

I will now open the call to any questions that you may have.

(Operator Instructions). First question comes from the line of Jim Janesky, Avondale Partners, please proceed.

Yes. Good afternoon. A couple of questions. What was the Boeing revenues in the quarter?

Hi Jim. The Boeing related revenue was a little bit under $25 million.

That was $20 million last quarter, right?

In Q1 of this year it was about $23 million. So yes, up a slight bit from Q1.

You talked about the segment a little bit about growth rates by various areas, and you highlighted construction was up about the mid-teens that was similar to the first quarter and then you talked about the manufacturing or Spartan. What is happening within the core Labor Ready brand both on the top line and on gross margin trends? What we are trying to get at is we understand that there is a mix going on and Boeing has somewhat of an effect on that, but as the margin profile for each of your segments changed over the last six months or so?

Jim, this is Steve. It is a great question, because with this strong vertical approach and the strategy that we are undertaking for both expanding our mix from local customers to more regional and national, along with these other brands outside of the traditional quick fill business, it has changed our profile quite a bit. Your question is focused what is going on currently. We are excited that right there at the fundamental branch level in Labor Ready, not only is sales growth accelerating, we have seen margin improvement there also. Over the last couple of years there has been margin degradation, gross margin degradation, out Labor Ready. That was a result of a couple of things. Construction going away which was our highest margin business, and two, just general economic conditions overall.

What we are really excited about is the national presence of customers is not the part that is degrading our margins. These are relationships that exist with national accounts, but it is still served at the local level. We have a great network of branches and employees spread across the communities, and we are building these relationships at the corporate level with several national players. We have a talented team that knows how to take that sell at the national level and implement it down to the local level that is holding our margins up really well on these large accounts, these national accounts. So I think that is good news. The most recent increase in gross margin that we have seen over the past month or so is short lived, true, but exciting in this environment, that we can get a little margin expansion within the environment we are operating in.

Okay. Thank you.

Next question from Sara Gubins from Bank of America/Merrill Lynch. Please proceed.

Thank you. Following up on that could you a bit about bill rate trends?

Well in general they have been improving. We don't give out actual percentages because of the mix changes here, but Steve just talked about some of the improving trends that we have been seeing. It has been because of widening spreads between bill and pay rates.

Okay. On the top line it looks like you are outperforming the overall temp market in the US. I am wondering if you could talk about what you think is driving that, and perhaps just the expansion to more national and regional accounts, and maybe just what drove the acceleration in the growth rate during the quarter?

I think what I was talking to Jim about, this vertical approach of having industry experts, and being able to speak the language of these customers on a national and regional level, and then be able to teach the local market leaders how to implement that at a very local market level, with the abundance of employees that we are able to round up and get on site quickly. That capability is a unique strength that we have. We have proven it now that it is working in large strong industries that we have been in throughout our history, and we are moving into new industries that haven't been our stronghold.

For instance, when pre-2006 we were mostly construction heavily in the waste business, and served several short term on demand needs. We now find great penetration in several industry verticals, other than just construction and waste. Not only the acquisitions that we have done have added great vertical strength in aviation mechanics, more in manufacturing, and truck drivers, but skilled professions also. The skilled trades. Broadly that is driving the results. Great strategists with great implementers. The two together drive results.

Second to that is we continue to look for new avenues of business. Most recently we have been succeeding in the solar business, and the energy business, in that we have found ways to get, build the relationships with the right players in that business, and we only do that through succeeding on service delivery out on the construction site, out on the site where the solar panels, or other energy projects are taking place. That is a growing market. We are having growing presence. And I believe that we are winning in that game. That is one new avenue of revenue. We have many like that that are growing and sprouting. That is the overall driving trend, not one customer, not one industry, but very broadly driven.

Great, last question. Within your revenue guidance for next quarter can you talk about what you are expecting for Boeing?

Our estimate for Boeing revenue continues to be in the $20 million to $25 million range. We talk to those folks regularly. That is our best estimate right now.

Okay. Thanks a lot.

Next question comes from the line of Kevin McVeigh, Macquarie. Please proceed.

Great, thank you. If you could give us a little color on the A1 Staffing acquisition, how large it was, what you paid, and how much it contributed to revenue in Q2, and what we expect in Q3 as well?

This was a smaller acquisition that we tucked into Spartan. We are not discussing purchase prices or anything like that, but what you can expect and you can see from our slides if you do some digging, that on a total annualized basis, I am not talking just fiscal year here, I am talking on a future four quarter basis, this would be about a 1% addition to revenue. It will be accretive to both EBITDA as well as net income. This is a smaller tuck-in, gets us to three more adjacent states which was a great reach for us. We are quiteexcited about the quality of that business.

Super. The margin profile of the Boeing business, has that changed at all in terms of the types of services that you are doing for them?

No, I would say the mix there remains to be about the same type of work that we have been doing historically for the last three or four quarters.

Great. Thank you.

Next question comes from the line of Paul Ginocchio. Please proceed

Couple questions, first maybe talk about what hit May, why was May a little bit softer? If I missed that I apologize. Then talk about what brands or end markets or geographies are driving the acceleration you are seeing?Second, was there any workers comp reversals in the quarter, and if so can you size it? Thanks.

Let me talk about May. May on a year-over-year basis was down, because we had a large industrial project in that quarter last year. It had mostly to do about the comparable. There is a footnote down at the bottom if you look at the 8-K slides. I don't know if you got a chance to see that, Paul, it will give you what the normalized rate would be excluding that. I will look it up to give it to you right now.

I see it, it would have been at 13%. Got it.

Work comp reversals there was a reversal. What we are talking about just to clarify for everybody on the phone, is a reduction to our workers' compensation reserves posted in prior periods, and that reversal represented about 1% of revenue this quarter. What was the last question?

What is driving the acceleration is it a brand, end market, or a geography?

Yes. I think Steve covered a lot of that. It is not just one brand. It is not one market. It is not one geography. It is really pretty widespread across the verticals, so we have got a great vertical team in place not just from the sales but from a service approach. They are having a very good success in going to market, and delivering to the market.

Steve, you mentioned almost everything was growing, almost every end market. What is not growing?

Well, I think it is sliced and diced. It would be silly for us to talk that deep. In general we are seeing growth in construction, and that has been the laggard. And that is the one that over the last year or 18 months we said everything is starting to show signs of growth and everything is growing well, and construction hasn't been. At times residential construction poked its head out and grew, and other times it stepped back. We are still seeing those same kind of signs, where every once in a while there is a spurt, but it is not lasting yet enough in new residential construction.

Commercial construction has been growing across the board, and it has held up pretty strong still, especially in the remodel business. Most of the residential work that we do is remodel. The remodel work is good. New construction is not good in both commercial and residential. Industrial business Derrek talked about we had a big industrial project in May. That was a great project last year. Those projects kind of come and go. They are not consistent projects. Most recently we have had some great growth in green projects and construction, putting up the solar panels and such. Construction overall has been our laggard. We are showing mixed signs of some good in there and still some bad signs.

Other than that, Paul, it is pretty good across-the-board. Manufacturing was leading the way the last year. It softened up a bit, because we have a pretty strong weighting in the auto business. That got pretty soft this last quarter. It seems to be firming up now, and we are expecting better growth from that in the future. The Japanese impact of that still hasn't found relief, but it is not getting worse. Other than that, it is looking pretty good

Can you remind us is size of the auto exposure, total revs as a percent?

Percentage-wise it is probably less than 5%.

Next question comes from the line of Jeff Silber from BMO Capital. Please proceed.

I am going to play devils advocates here. It was great to see the trends pick up towards the end of the quarter and the beginning of this quarter. I know that there is not a tremendous amount of visibility in the verticals that you are in, I am just wondering what gives you confidence that those trends will continue for the rest of the quarter? Thanks.

We can only run our own business, and we can only put great strategies, great people, great contacts, great systems and great stuff in play, and then we can go off of what our current results are. Things were weakening up in the beginning of Q2, not drastically but our own results, we showed strength as June, as we went through June, and now into July. I think our forecast for the next quarter is based on the last six weeks of strength. We are surely not trying to predict what is happening out in 2012, we are taking one quarter at a time.

Okay, that is fair enough, I appreciate that. I think Steve in your remarks you talked about competitive pressure. Can you give us more color about what is going on there?

It has been an interesting couple of years, with high unemployment costs coming on and states needing to cover their payroll taxes because of that, the federal government putting a HIRE Act credit in, and then pulling it back. Those types of things impact the profitability of staffing companies, and various companies respond in various ways. It feels like at the local level and local competitors are diving on that pricing game still. It feels like it has stabilized this summer. But in general over the last couple of years, there has been somewhat of a, if I reduce my prices my volume will go up, especially with local competitors. That is what we are seeing stabilization this summer. That doesn't seem to be a big pricing war. It doesn't mean we have a lot of traction. It is sure nice not to have the industry working against itself.

Okay, that is great to hear. Just a quick numbers question, can you give us what the branch count was at the end of the quarter? Were there any branches closed during the quarter? Would that include the A1 count in there?

Sure, we had 724 branches at the end of the quarter. There were before closures which were really more consolidations, one of which was A1 related.

How many branches did you pick up with A1, or you just rolled them into your current branches?

We picked up 8 with A1.

Great. Thank you so much.

Next question comes from Clint Fendley from Davenport. Please proceed

Thank you. Good afternoon, guys. Two questions. First I wondered I know this quarter was one of the worst periods in many years for tornadoes. Did that impact you guys during the quarter?

It wasn't material, Clint. It obviously impacted the local markets where that happened. There were some terrible disasters, and our hearts go out to those communities, and we were there to help them recover. We remain there to help them recover. We had some of our operations get hit hard themselves, some of our buildings, some of our employees. Those are real heartfelt situations. As far as impacting our results one way or the other it really didn't, Clint. They were small, isolated events, although big to those people. No disrespect to there, but it didn't impact the results overall.

Nothing material like you have seen from hurricanes in the past?

Right.

Last question, I wondered on Boeing, obviously the vast majority of their manufacturing is in the US, I know they just eeked a rather large deal for 200 planes with American Airlines. How would you expect that to impact your work with them going forward?

Like Derrick talked earlier, we take with Boeing, take it one quarter at a time. We have had a pretty good shift in what, helping them get the line up and running, and now really helping them on warranty repairs on those plains. As far as other lines besides the 787 we really haven't broken into that. We are kind of a one plane company with the Boeing Company. That is where our focus is. In that entity, we are seeing more growth with military opportunities really than other manufacturers or other lines within Boeing. That does not mean it won't open up. We have got some great relationships with Boeing. But right now, what you just mentioned that doesn't seem to have an impact on us.

Okay. Thank you, guys.

Next question comes from Mark Marcon from RW Baird. Please proceed.

Good afternoon. Congratulations on the results. I wonder if you could talk a little bit more about the regional and national strategy in terms of approaching verticals?Are you doing that across the entire organization? In other words, do you have people who are representing Spartan and Labor Ready and TLP, or are they brand specific?

We grow out of roots of Labor Ready. That is where most of our branches are. Most of the vertical approach that we have spoken about is how to get Labor Ready focused on national players, since we have so many local markets. Our other brands are regional players that we have expansion opportunities that we are working on. They don't have as much national presence. We are not focused on that as much.

However, as they get larger they have more national opportunities that they get to play in, and when they do that, these same vertical leaders that have these national relationships are definitely providing and finding opportunities to expand these other brands. You have to have the locations, you have to have the geographic exposure to be considered a real player with these national relationships. Secondly, some of our other brands are industry verticals amongst themselves, like Centerline, the truck driving division. It is very industry driven just on that. The branding itself and the way it is structured is a method of a vertical implementation.

Is Labor Ready showing the strongest improvement among the brands, or are they all consistent?

It is a bit mixed. Labor Ready is strong right now. The other brands are still small enough in revenue size that when they get a big $5 million project, it gives them a really big strong growth there for a month or two while they have that project going. Whereas when Labor Ready gets a $5 million project opportunity, it doesn't boost their growth rates as high as it might if it was one of the smaller brands. So if we talk on percentages, these percentages hit these smaller brands a lot harder. Dollar-wise they are all finding these projects and these opportunities to grow.

We are finding that the lines between our brands are getting softer. We are having more opportunity to approach customers together, and that we are finding more efficient ways to be in the market together, which is good for everybody, it is good for those employees that are out there selling, it is awesome for the customer that wants to access broader services, and it is definitely good for shareholders.

That is great. Within Labor Ready what percentage of the Labor Ready business is now derived from some of these national or regional accounts?

Our national account business at Labor Ready represents about 25% of the business, which is getting close to anniversarying the mix of last year. It has grown quite a bit. It has been an area that we focus on, and succeeded in various ways both during the recession and coming out of the recession, and that is where it stands at right about now.

On the solar panel work and the alternative energy, is that being serviced out of Labor Ready as well?

I would say there are two parts really to the solar business that we are experiencing. One is in more traditional commercial remodels, where a building is putting in some solar panels on the top of the building and both the Labor Ready brand and the CLP brand are participating in that, as just a part of the normal commercial nonresidential remodel work. On a bigger scale our CLP brand has a very specialized practice, what we refer to as industrial. It has some great experience on serving larger scale installations of green energy facilities, and CLPs participating in those larger scale projects, which has grown very nicely.

Can you clarify the payroll tax benefit that you saw in the second quarter?What exactly was that related to?

Well that was related to, and a payroll tax exposure that we had prior to this year, and during this year we got resolution on that matter on how much it actually was, and came to a final resolution of it, and that is the benefit that we are calling out.

Great. It was good to see the repurchase authorization. Can you remind us how quickly you acted on your last authorization?

Back in 2006 and 2007 we were moving along pretty well. The recession came along, and we needed to watch our own house and make sure that our own capital was going to be strong, and as we worked through the various programs, we pretty much just put it on hold a bit through that period of time, and we got restarted here, and we moved through close to $20 million worth over the last couple of months.

Great. Thank you.

Next question comes from the line of John Healy, Northcoast Research. Please proceed.

Thank you. Derrek a big picture question for you on the gross margins in the business. I know the mix of the business today is very different than it was three or four years ago. I was hoping to get your thoughts assuming the labor market tightens a little bit, what you believe the normalized gross margin level for the Company can be over the next couple of years?

Well, that is a pretty tough question. It is a good question, but I don't think I can have an answer to that one. There is going to be a lot of factors really driving that, and two that I would point out, is how fast small businesses come back to the table. That is going to have an impact on our gross margin. Number two, our own business we are as Steve alluded to, we are digging deep, and our team is being extremely disciplined so that we can get back to stable growth margins and then try to get into some expansion. That doesn't come easily.

And then number three is what happens on the residential side. We have yet to see that piece come back, and all three of those things will have a bearing on our gross margin, and lastly this vertical strategy that Steve has mentioned, we are getting a lot of success here. You are seeing it on the sales line, but we believe we can continue to leverage that down to the smaller customer level, and sell and service customers at that level even better than we have before. We are still in the early innings. I just couldn't give you a percentage there.

That is fair enough. I guess along the lines of growth, and I might have missed it. Can you guys talk about what you are actually seeing from the small business customer, not aside from results, but just from a commentary standpoint? Are you seeing life there? Are you seeing any sort of inflection point or change in the tone or trajectory in terms about how they are thinking of adding temporaries to their work forces?

Our growth at the local market level is showing great strength. There are accounts that exist at the local market level that tend to be smaller than these national accounts. It represents the bulk of the business. This past three or four quarters, that group of customers has showed increased revenue growth. So we are seeing some strength there. The growth in our national account business again implemented at the local level is also showing strength, so the two combined are really good.

Getting into whether we call it small or medium, or whatever size of customer. A lot of that, we don'tkeep track of how big that customer's business is, we keep track of how much they buy from us. So one thing we do know is that the account size is getting larger, whether it is a local relationship or a national relationship. I think that is good for our business. There might be fewer relationships to manage, but each opportunity gets more attention, and grows larger. John, that doesn't define whether that customer themselves only had 10 employees or 100 employees, it is about order flow, and about our side, how much revenue we get from each customer that is most important. That is where our focus is.

Got you. Thank you so much.

There are no further questions at this time. We will turn the call over to Mr. Steve Cooper for closing remarks.

Thank you for joining us today. Your attention and questions are appreciated. We look forward to reporting the results of Q3 to you, as we continue to drive industry leading growth. Our excitement is growing as well. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.